Winning iPhone Orders is no Longer Victory

Apple is a great customer to have. But the timing's not great to get into iPhone assembly.

Good Evening from Taipei,

Foxconn this month will undertake an annual ritual that’s made the Taiwanese company famous, and very rich: shipping iPhones. It’s been the primary assembler for Apple since the beginning, and still accounts for more than 70% of all units produced.

This year, Luxshare-ICT will likely sit alongside Foxconn as a launch-supplier, as opposed to being a second-string assembler that joins some time after the first wave of products are manufactured.

This isn’t as big a piece of news as it might seem: Luxshare held that role last year after Apple got jittery about leaving its launch party solely in the hands of Foxconn. Much-lauded scoop machine Kuo Ming-chi also flagged as much some time back. (That’s about all I know, for now. If you have any direct information to share, please contact me). There have also been conflicting reports that BYD of China also got iPhone 16 orders.

A decade ago, I would have said this is a big deal and a huge victory for Luxshare. Today; not so much. This is not a dis of Luxshare. The Chinese company has done a good job of working its way into Apple’s supply chain including the manufacturing of Apple Watch, AirPods and Vision Pro.

However, data shows that last year’s boost for Luxshare didn’t translate into anything meaningful for the company. Total revenue for the fourth quarter of 2023, peak season for iPhones, climbed just 5.5%, and in the first quarter of this year it was only 3.7% higher.

For the full year of 2023, revenue from Luxshare’s consumer electronics business — which includes iPhone, Airpods, Watch and some non-Apple businesses — rose a mere $1.3 billion. By contrast, Apple brought in $96 billion from its hardware products in the December quarter alone. So there’s no indication that new iPhone orders added much incremental business to Luxshare.

Maybe that will change with iPhone 16; Luxshare may snag a larger proportion of orders this year. If so, it’ll be swimming against the tide — and not in a good way. Smartphone growth has slowed and the iPhone isn’t immune. Pockets of strength will show up from time to time, but we all know where the long-term trend is heading.

Apple’s sales from iPhones and wearables have been soft in recent years. That’s a disaster for Luxshare because Apple accounts for 75% of revenue. Its investors are concerned about this concentration risk, and management haven’t yet been able to execute a feasible strategy to address it.

Foxconn is also addicted to Apple. But not as badly. Hon Hai, the company’s flagship, got 59% of its sales from Apple last year. Despite this reliance, Foxconn is having a great year because of the explosion in AI. It’s a key assembler of Nvidia’s AI servers and is gaining more business from its long-time clients in the cloud-service provider space (CSP). These products have a higher price and better margins.

Luxshare needs to copy the same playbook: go bigger into servers, especially AI. It has two strategies it could follow, both of which will be more challenging and risky than what Foxconn has pulled off. First, it can try to convince Apple to give it orders for the iPhone-maker’s own AI servers. These are run on Apple Silicon, which means the processors are likely fabbed at TSMC. Such an approach means becoming even more wedded to Apple, counter to management’s stated strategy of reducing reliance on a single customer.

Alternatively, it can try to chase down AI server orders for Nvidia as well as big CSP players like Meta, Alphabet, Microsoft and Amazon, which mostly have their chips made by TSMC in Taiwan.

Management has admitted in investor calls that it’s been a little slow to the AI party. US-China tensions, particularly chip embargoes, won’t much help it make up for lost ground. The company is hoping to get some meaningful AI revenue with the release of its own version of the Nvidia GB200 NV72 server, built around the forthcoming GB200 Grace Blackwell Superchip.

Because leading-edge chips can’t get exported to China, where it has 75% of its production capacity, Luxshare probably needs to assemble AI servers at its site in Mexico — where Foxconn also has a factory doing the same thing. (Although I am not accusing Luxshare, or anyone else, I wouldn’t be surprised if some Nvidia AI servers make their way from Mexico to China)

Luxshare’s challenge is that, by its own admission, it has excess production capacity in China — great for making iPhones & wearables, but not helpful for AI servers if it can’t get leading-edge chips into the country. The company also said back in April that capex has peaked and will decline in coming periods. If it wants to expand capacity in Mexico (or India or Vietnam), it may need to shell out more money to compete with Foxconn, and also Wistron, Quanta and other Taiwanese server makers.

Or it can double-down on iPhone production, making use of that excess China capacity. Now that it has a foot in the door, which includes an established relationship with relevant Apple teams and growing expertise in iPhone assembly, there’s certain wisdom in leveraging the connection.

Its decision in December last year to buy a factory from Pegatron in Kunshan, in addition to earlier purchases from Wistron — both major Taiwanese contract manufacturers — indicates this is indeed the strategy.

But doing also risks following the path of compatriots like BOE, which got into the liquid-crystal display business just as global demand was starting to peak. BOE now dominates the LCD market, but posted a 21% drop in revenue over the past two years alone, and the rivals it overtook exited the sector. Taiwanese manufacturers have a knack for picking trends and jumping on them, they likewise are quite adept at ditching dying businesses — Luxshare ought to have kept this in mind, or at least learnt from BOE.

Nevertheless, Luxshare obtaining primacy in the iPhone assembly business can still be seen as a win for the company. But much of victory comes from timing, and right now doesn’t seem particularly opportune.

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